Deflation-weary Japan gets more aid; critics skeptical

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Masaaki Shirakawa, governor of the Bank of Japan, won praise from the new prime minister but some analysts called the bank’s latest stimulus measures inadequate.

By Nelson D. Schwartz and Hiroko Tabuchi
New York Times
January 23, 2013

Another central bank, another round of unconventional monetary policy.

Following the lead of their counterparts in the United States, Japan’s central bankers announced Tuesday what they called a groundbreaking effort to reinvigorate the country’s long-moribund economy and defeat deflation.

With no more room left to cut interest rates and previous steps unsuccessful, the Bank of Japan is taking a page from the Federal Reserve’s playbook and will pump trillions more yen into the economy by directly buying government bonds and other assets. It also doubled the country’s official inflation target to 2 percent. The action came after months of intense pressure on the Bank of Japan from the country’s audacious new prime minister, Shinzo Abe, to take more aggressive action to bolster the economy.

But as in the United States, there are doubts about just how much of an effect the move will have in Japan. Three rounds of asset purchases since the onset of the financial crisis have successfully headed off deflation in the US economy but failed to generate the kind of growth necessary to return employment to prerecession levels.

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Japan’s move is also likely to further devalue the yen in the long term — causing some to worry about a possible round of competitive devaluations as countries weaken their currencies to bolster growth in exports. On Tuesday, however, the yen actually rose against the dollar and the euro amid disappointment that the Bank of Japan’s efforts had not gone far enough.

Traditionally, curbing inflation, not worrying about deflation, has been the principal task of central bankers. But when economies enter prolonged periods of slow growth, or even contraction, other concerns come to the fore. Ben S. Bernanke, the Federal Reserve chairman, was keenly aware of Japan’s long-running struggle with deflation as well as the American experience in the Great Depression when he began the first round of US asset purchases, or quantitative easing, in November 2008.

After a second round of quantitative easing beginning in November 2010, the Fed started a third round in September. It said in December that it would continue to purchase $85 billion in Treasury securities and mortgage-backed securities each month until the job market improved. After considerable pressure, European central bankers also began moving more aggressively last year, vowing to do ‘‘whatever it takes’’ to keep the eurozone from fracturing.

Given the scale of the efforts in the United States and Europe, many experts were disappointed by the Bank of Japan’s action because the expanded asset purchases will not begin until 2014. They complained that was a waste of valuable time in turning around an economy whose descent into deflation has become a test case of the effects of doing too little in the face of an economic slowdown.

To make matters worse, the Bank of Japan’s new plan to purchase 10 trillion yen, or $112 billion, in assets each month sounds more aggressive than it actually will be, said Gustavo Reis, senior international economist at Bank of America Merrill Lynch. That is because many of the securities the Bank of Japan will be purchasing are in the form of short-term debt that will quickly mature, so the additional purchases will equal about $112 billion a year — not a month — beginning in 2014.

‘‘The Bank of Japan should be more aggressive,’’ Reis said. ‘‘It’s a step forward, but given where their economy is, they need to do more.’’

In fact, with such a small annual increase in asset purchases, it is unlikely Japan will achieve 2 percent inflation, analysts said. The Consumer Price Index for 2012 fell 0.5 percent, according to government statistics. The Bank of Japan’s announcement ‘‘will likely disappoint those who expected the policy board to answer Abe’s call for a ‘different kind of BOJ policy,’ or significantly ramp up its pace of easing,’’ Izumi Devalier, an economist with HSBC, said in a note to clients.